Update: Talking of defaults closer to home, in Europe, Tim Worstall has been writing that it would be better for countries to openly discuss, and then manage, the chances of default rather than bury their heads in the sand. Meanwhile, Bloomberg columnist Matthew Lynn argues that the demise of the euro can and could be handled much more smoothly than many people believe. I hope he is right.

Another update: Dan Mitchell – of the Cato Institute, talks about lessons from Argentina. Oh great.

April 18th, 2011 |

19 comments to Confirming what many people believe about US debt

For Greece, they are already above the pain threshold. The only question is when will the Greek political parties stop playing to the EU and start playing to their own people. I reckon it will be sometime this summer, at the very latest by the autumn.

Once Greece goes then the Irish and Portuguese will given substantial reductions in the interest they are paying on their EU bailout funds to make sure they don’t default. This might stop the rot, but it doesn’t make the debt go away. I think default will hover back into the frame for Ireland and Portugal sometime in 2013.

For the US, default would be an absolute anathema to the ruling elite (it’s there money after all, but the publics debt), however at some point the chickens will come home to roost and people will stop buying T-bills at any reasonable price. Then watch as the gears of US government come grinding to a halt.

This is S&P firing a shot across the bows of US fiscal policy. What they are saying is “We have every justification – sort your shit out now or we will actually have to knock you down a peg or two and then see how you react”.

I can hear the old women in congress already clucking up a storm. Serves the old bastards right.

Well, it’s a start. The real fun begins when the coming generation figures out it’s going to spend the rest of its life paying for the current folly and announces that as soon as it has control of the Congress – say, in fifteen years – it fully intends to default. THEN let the government try to borrow more.

Technically, S&P only downgraded its “outlook” on the US; the actual ratings on US government bonds remains AAA (the highest possible rating). (See this.) But, as John G says, it’s a warning shot, and in my opinion long overdue. It will be interesting to see if the other two major rating agencies (Moody’s and Fitch) follow suit.

Right now, it’s running roughly revenue-neutral. It could be wiped out, and Social Security set to neutral by indexing the retirement age.

How is that fair? So not only will I have to pay in longer than current retirees, I’ll get less back? If they want to raise the retirement age I’m all for it, as long as they raise it for everyone. Starting today.

That damn systems was ‘pay as you go’ FROM THE BEGINNING and once the income exceeded the liabilities ( starting on DAY ONE ) the crooked bastards COULD NOT keep their hands out of the money pot
and have used it to buy votes ever since.
In addition, the bastards who passed this abomination, FDR et al, KNEW ( like many politicians know today ) that they would be long gone ( out of office if not
dead ) before ‘the bill came due’.

Today, the ignoramuses in this country ( of which we have an over abundance of ) who have gotten their ‘economic education’ from television REALLY think that the gov’t has warehouses full of money ( trust fund etc. ) and it’s all freeeeeeeeeeeeeeeeeeeee !

“This is S&P firing a shot across the bows of US fiscal policy. What they are saying is “We have every justification – sort your shit out now or we will actually have to knock you down a peg or two and then see how you react”.”

And the thing is, the rating agencies are often a lagging indicator — they usually act only after the smart guys in the market have already moved their money. I can make an argument that default, in a sense, has already occurred. What else is QE? It’s the Fed printing money so it can “buy” Treasuries that were otherwise unsellable at a rate that the Treasury could afford. If those $500M of Treasuries has been auctioned on the open market, the cost of that borrowing would have gone way up, and done even further damage to the budget. (Instead, the Fed is playing a game of chicken with the bond market. They’re trying to see how much existing liability they can inflate away without the inflation-adjusted yield on existing bonds going negative. One miscalculation, one little flinch, and it’s going to look like Webber at Valencia.

Too bad these same ratings firms weren’t as vigilant in rating toxic mortgage securities somewhere between piss and shite, then we wouldn’t be as deep in the hole as we are now. When questioned about their shoddy ratings, they reply “but our ratings are just ‘opinions'”… oh really?

I like the bit about American policy being a combination of a drive for Swedish levels of government spending (and the gap between Sweden, which has the highest government spending in the world, and the United States is closing – especially if one includes ALL American government spending, the books are a lot more cooked in America than they are in Sweden) and Argentinian levels of interventionism.

And that is just the official policy – leaving out any hidden agenda that people like me think that Comrade Barack (and his Legion of allies) have.

Therefore (all the above being taken into account) anyone who risks their money on a real (as opposed to Federal Reserve generated) American recovery has only an insanity defence.

I am serious – lawyers may already be thinking of what cases can be brought against banks, investment advisers (and so on) that advised their customers to put their money in things like American Treasury Bonds. And State and local bonds.

After all the evidence is out in the open. At best there is going to be a de facto default (via inflation).

As for the stock market – it is no secret that it a Federal Reserve bubble.

The important words there are “no secret” – i.e. the evidence is out the open. So people who have advised their clients to invest in the American stock market or have done so with clients money (as funds do) are laying themselves open to furture legal action when the market crashes (which it will – sooner or later, and not much later).

For the record I REJECT this form of legal reasoning – I beleive you are still free to reject investment advice (pull your money out of fund, or whatever) and should not go screaming to a lawyer when things go wrong.

However, that is not how many American (and more and more nonAmerican) lawyers see things.

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